Money & Banking

Our core business philosophy rests on ‘transparency, full disclosure’

NS Vageesh | Updated on January 16, 2018

R BASKAR BABU, CEO, Suryoday Micro Finance

You have to be adequately capitalised if you are in unsecured lending, says R Baskar Babu, CEO, Suryoday Micro Finance

R Baskar Babu, CEO of Suryoday Micro Finance, radiates clarity, conviction and other old-world values while discussing his plans for the small finance bank that they propose to start soon. Baskar made the transition into being an entrepreneur after a long career that covered the gamut of finance operations — from hire purchase, leasing, merchant banking, broking, commercial vehicle finance, et al. His entrepreneurial journey is remarkable for the fact that it did not follow the usual path — he didn’t go after the money, making multiple pitches to secure capital. It came to him, as he recounts modestly. His first investor handed him a cheque and a carte blanche — at a time when the global recession had set in 2008-09. Numerous friends, colleagues and fund managers chipped in without asking what microfinance was about, putting their trust in him.

The journey since has not been smooth. There have been challenges aplenty. He has drawn sustenance and inspiration to steer the course by a set of values that sound almost anachronistic. He recalls an erstwhile boss urging his employees to be as honest as possible so that the burden of remembrance comes down. Those earthy homilies struck a chord in him and if the response from angel and venture investors is anything to go by, he has clearly absorbed those lessons well. His straightforward responses and his clear lines on what his organisation will do and not do, help explain how he has been successful in this journey, even as he braces for the challenges ahead. Excerpts:

How did your entrepreneurial journey begin?

After a career in finance across many companies/lenders, I wanted to do something in microfinance — although I was not yet clear on the path.

My friend and colleague Vasudevan (Equitas) introduced me to microfinance and then to one of his investors Vineet Rai of Aavishkar Capital.

I discussed my idea of starting a venture in this area — although I was not sure and I did not have either capital or experience. He immediately said that if I start, he would seed fund it. It looked too good to be true.

Normally, you go to the investor for money and he will tell you all the reasons why the plan won’t work or why you won’t succeed. That’s how discussions happen. Across the table, he told me to put in ₹2-3 crore along with my group and he would put in an equal amount at a premium. I said thanks.

By the time I mobilised the money, 2008 happened. So what looked like easy money, getting a cheque for the asking, became very tough — almost impossible.

So, I went back to him and asked if his commitment stood — since the conditions had changed. He replied that both the quantum and the pricing were still the same. That gave us confidence.

Then we reached out to friends, ex-colleagues and contacts. All of them chipped in with ₹10-20 lakh each — without asking what microfinance was. One side, your investor says this and your friends too back you.

What were the teething troubles like?

We were just about to start our venture, when the Satyam crisis happened. There was no clarity, but we had to start — with both feet in play. Our first investor was patient and that helped us focus. He allowed us to do what we thought was right, or what can work.

There were no set rules or demands that we tread a path laid out. Starting out in 2008-09 taught us that we had to keep our feet on the ground, and that markets can turn either ways — without notice.

Why did you start operations in Pune?

We were from Chennai, settled in Mumbai and then went to Pune, because it was under-penetrated.

We started with five branches. We felt that if we get our first 10,000 customers right, we will be able to build scale after that. We got a fresh NBFC licence in 2009, rather than buying out licences which was the prevailing trend then. It came in four months.

Was it a smooth journey from then?

We started in Pune and swine flu happened. Suddenly, we couldn’t go to the field. Our entire money was in a particular area, but we couldn’t enter the field or meet customers, because it was contagious. Then we learned by experience and understood what is risk mitigation by geographical diversification. That was lesson number one — don’t concentrate on one market.

Then we went to Salem — it was another State, which we knew something about and where we had colleagues to help. The potential was high, so it didn’t matter where we put the branch. There were enough customers. Our core philosophy was that whatever business we do, let us be transparent and have full disclosure.

If we can’t disclose, let us not do it. That probably helped us, looking back, in culture setting.

Do things you want to do, say you want to charge 25 per cent, put it on your website and tell your customer. We lived by some simple rules. Do the right things. Disclose first. Keep efficiency in mind.

How did the microfinance crisis affect your fund-raising?

Yes,the Andhra crisis in microfinance happened, but we were sufficiently capitalised then.

We had raised our second round from Lok Capital. Lesson number two was that you had to be adequately capitalised if you are in unsecured lending — beyond what is regulatorily required even if it was counter-intuitive in terms of returns.

In finance, better the leverage, better the returns. But I said no. Let us not leverage ourselves too much. Even if it was regulatorily allowed to leverage eight times, I stuck to four times.

What are the challenges that you will encounter on conversion to a bank?

We have to deal with regulatory compliance. Our liabilities have to grow, we now have to build a deposit franchise.

As an NBFC, you need 3-10 people for treasury operations. Now to replace those liabilities with deposits for the bank, we will need 1,000 people — because of the size of deposits.

Technology expenses and even the cost of a branch seem very high. We used to do it in ₹1.5 lakh. Now it looks like it will cost ₹20 lakh for a branch. I don’t have an answer for all of the challenges right now and we will tackle them as we go along. But we definitely don’t want to look like a wholesale bank on liabilities and a retail bank on the assets side.

That is fraught with tremendous risks, including liquidity risks. Even at the cost of growth in the initial years, getting the liability mix right becomes very important.

Published on October 24, 2016

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